The ReFi Game

Need an upgrade? Borrowing against equity has never been cheaper. And it's a buyers market for used airplanes.

By Jon Doolittle

For many in general aviation, these are the worst of times. Manufacturers are retreating, operators are feeling the pinch caused by soaring prices for fuel and insurance and due to the economy, the market is awash in used airplanes.

On the other hand, for many in general aviation, these are the best of times. Large numbers of airplanes are for sale. The cost of most used airplanes is lower than it has been in years. Even some new airplanes are affected.

And at the same time, interest rates have never been lower. The cost of financing the airplane of your dreams has never been cheaper and the capital cost of ownership has always been the largest single expense of owning an airplane.

Interest rates that aircraft lenders charge us are based upon the amount those lenders pay for funds, which is tied to such benchmarks as the prime rate or the federal funds rate.

If these rates go much lower, the money will be free. If you still have a job, there?s never been a better time to borrow money and buy an airplane or to upgrade what you already own. If you already have an airplane with lots of equity, you have powerful leverage to improve your lot in life and the window of opportunity won?t remain open forever.

Competition Galore
There are a large number of companies eager and willing to lend you money for your aircraft. A quick pass through Trade-A-Plane found 18 different lenders. Some of these are traditional banks with aircraft loan departments. Some of the larger of these include Cessna Finance Corporation and MBNA.

Others include smaller local and regional banks with aircraft lending departments such as the First National Bank of Clinton, Red River Bank, Putnam County Bank, First National Bank Midwest, and First Pryority Bank.

In between there are lenders such as Eaglemark (Harley Davidson Financial Services), Scope Aircraft Finance, Center Capital, Unizan Bank and Sovereign Bank. With all of these institutions, you’re dealing directly with a loan underwriter.

There’s also a spectrum of lenders who are not themselves banks, but who have relationships with banks and who have varying degrees of authority to act on behalf of one or more banks. Most of these ultimately have to go to the bank for final authority to make a loan commitment, however.

These companies provide most, if not all, of the up-front services that a bank would perform. They provide you with applications, credit forms and they handle title searches. Most of them also remain your point of contact for whatever service you need during the life of the loan.

In many cases, you won’t notice any outward difference between one of these loan originators and an actual bank loan officer. Loan originators make their money by charging a fee to the borrower. Sometimes, the fee is up front, but more often it’s included in the rate that you get from the bank.

From the research that we’ve done, it doesn’t appear that there’s any extra cost associated with using one of these originators, as the business is so competitive at the moment.

Some of the non-bank originators are fairly large and most that we talked to were specialized and knowledgeable. These include companies like Aviation Capital, Aviation Finance and Marketing and Dorr Aviation.

There are also lenders who act as brokers. A broker will shop a loan application around and, for a fee, will place it with the most competitive bank for a given airplane and customer. A broker charges you a modest fee for doing the legwork.

Whichever type of lender you use, all are interested in the same fundamental question: Can you and will you pay them back? To determine this, they look first at your ability to make the monthly payments as measured by your income and other obligations.

They also look at your credit history to see if you pay your bills. In addition, most lenders that we spoke to also look at an individual’s net worth. As Aviation Capital’s Rocky Morse put it, “We want to make sure a guy can survive a maintenance hiccup.” Lenders told us that they were mostly looking for A credits – people with a good ability to repay and good credit history.Almost every lender that we talked to told us that the collateral used to secure the loan was the airplane. The airplane represents their way out if the loan heads south, so they tend to look it right in the teeth.

Is it a type of airplane they can sell? How much equity does the buyer have in it? Did the buyer pay a reasonable price for it? If the buyer overpaid, this cuts down on the bank’s cushion and gets it closer to red in the event of a repossession. Lynn Thomas of Aviat Capital told us that he tries to balance his portfolio. “Like any financial company, we are looking for diversity to help us avoid risk.”

One of the factors Thomas mentioned was the potential effect of an emergency AD on a given type of airplane and the ripple effect on customers who have to go on paying the monthly note for an unflyable airplane.

Most lenders want to see the borrower have at least 10 percent equity in the aircraft and some look for 20 percent or more, depending on the type of aircraft and the type of borrower. The more equity an owner has in an airplane, the safer the bank is in the event that they have to repossess it and sell it.

The typical loan package will consist of the following documents: Loan application, personal financial statement, personal guaranty and the last two years of income tax returns. In many cases, lenders said they could get approvals the same day that they receive the paperwork.

For borrowers with bad credit or who would have difficulty with the conventional loan approval process, one alternative is asset-based financing. Joda Partnerships is one of the leading asset-based lenders. In this type of financing, the asset, or the airplane, is the bank’s sole security. Equity requirements are likely to be higher, as are interest rates. But for many this will be the way to go.

Loan Types
Just as there is a variety of sources, so there is a selection of products available to would-be borrowers. There are three basic types of loans: fixed, variable and balloon. Fixed-rate loans are just that: The interest rate stays fixed for the entire life of the loan. Because the bank is guaranteeing you a rate without any guarantee of its own cost of capital, these loans carry higher rates. The longer the term, the more risk the bank is taking that its cost of funds will increase and the more premium it has to charge the borrower to offset that risk.

Variable-rate loans adjust annually to an agreed index, such as the prime rate as published in the Wall Street Journal. Because the bank is taking less risk, rates for variable rate loans are substantially lower but, of course, they can rise during the term of the loan.

Balloon loans guarantee a fixed rate for a pre-determined period of time, often three or five years, after which the rate increases to a stipulated amount for the rest of the term of the loan.

In addition to the type of loan, borrowers can choose different loan terms. In some cases, lenders will offer 20-year loans on light airplanes, but 10- and 15-year notes are more the norm. Increasing the length of the loan lowers your monthly payment but also increases the interest component you’re paying over the course of the loan. In the case of fixed rate loans, longer terms increase the interest rate, too.

Borrow Online
The internet is gradually changing the face of the loan business, as it has so many other fields. Virtually every lender has a Web site. Most of the sites allow you to download an application or to fill it out online as we’ll as the other forms that you will need, such as personal financial statements, guarantees and the like.

Many include loan calculators, which will let you estimate the size of your monthly payment. One site actually listed representative rates for its products, couched with suitable disclaimers. Speaking for many in the industry, Eaglemark’s David Garland told us that he’s looking to the day, not far off, when the entire process can be done online.

Lenders all said that their Web sites had had a great impact on their business. Some felt that delivery of documents was the greatest benefit of Web-based loan processing and one lender said that 30 percent of his inquiries started with his Web site.

Another said that the sites cut back on the preliminary discussions he has with potential customers. As one mid-western banker told us, “Most of these people have been to the site before they call, they know what kinds of airplanes we will lend for, what our equity requirements are, what we can offer and a lot of them have played around with the calculator and know roughly what the payment amount will be so they know what they can afford. It just saves us a bunch of time.”

Selecting a Source
Given the number of sources, products and other options, selecting the right lender and loan for your needs can seem daunting. Here are some strategies if you’re looking to finance an aircraft.

When choosing a lender, pick someone who’s recommended by others, who has been in the business for a while, who understands both the aircraft and financing sides of the equation and who you get along with. Our personal preference is to avoid the really large banks, although that doesn’t mean they can’t provide good service.

In the words of First National Bank of Clinton’s Robbie Fuchs, “Why not have a relationship with a person, rather than a department?” We agree.

We did not see appreciable price differences between any of the providers. It certainly pays to shop around, but we don’t think any one segment of the industry has a built-in price advantage. In the current low-interest market, service and ease of dealing with the voice on the phone count for everything.

If you currently own an airplane and your financing has been in place for more than a couple of years, we recommend that you look into refinancing due the low current interest rates. In general, most aircraft loans don’t have a pre-payment penalty and the up-front loan approval costs are minimal.

In some cases, you may be able to ask your current bank for a rate adjustment. If your bank is willing to provide you with a rate adjustment, you may avoid having to go through the entire loan application process again. Some banks will do this, provided you can show that you have a legitimate quote from another bank.

Most lenders that we spoke to admitted that they would look at rate adjustments on a case-by case basis. If you’re considering purchasing an aircraft, we recommend that you get a bank to pre-approve you for a loan. This will guarantee that you can go through with the transaction and it will also let the seller know that you’re a serious contender. Virtually every bank will provide this, as long as you provide them with satisfactory documents.

In some cases, manufacturers will have financing available. Nobody has more interest in making an aircraft sale possible than a manufacturer. If you’re buying a new airplane, find out what the manufacturer can offer first.

Apart from well-known lenders such as Cessna Finance, there are many others with special programs. Aviat Capital, for example, exists primarily (but not solely) to provide financing to purchasers of its Aviat, Pitts and Christen aircraft. Cirrus Design Corp has a finance arm as well, and there are numerous others.

When looking at what type of loan to choose, consider how long you expect to have the airplane and leave yourself a cushion, in case you can’t sell it exactly when you want to.

Most aircraft loans tend to run between three and five years, even though the note term is longer. By the end of that time, the loan is either refinanced or the airplane is sold.

If you opt for either a variable rate or a balloon, make sure that you can handle the higher payments likely to be coming down the road. It seems unlikely to us that interest rates will go much lower and quite likely that they will rise during the next 18 months.

Our personal strategy would be to determine what monthly payment we could comfortably afford and then take out a fixed-rate loan whose term allowed us to make slightly lower payments than that amount. This would allow us to be certain of our costs through the life of the loan.

Since most loans don’t have pre-payment penalties, we would then pay in extra principal each month, which would greatly reduce both the time to pay off the loan, as we’ll as the interest cost. (See sidebar).

Whatever works best for you, there’s someone – actually, many someones – who want your business in the current cheap money climate.

Do your homework to make sure that you have an idea of what you want and what you can afford. Try some of the Websites to get a feel for what’s available, then pick up the phone and talk to a few people. Given the great deals on aircraft available now and the record low cost of financing, we think that there has never been a better time to buy.

Also With This Article
Click here to view the Refinance Checklist.
Click here to view “Select Loan Sources.”
Click here to view “Standard Monthly Payment vs. Early Paydown.”

Jon Doolittle is an Aviation Consumer contributing editor. He owns and operates Sutton James Insurance in Hartford. (